Monday, July 1, 2013

The decline of UK manufacturing - and falling interest rates

The announcement of the Fed Reserve about potential ending of Q.E. has caused a rise in US bond yields. However, UK savers have seen a significant fall in deposit rates.

The fall in saving rates means that bank rates are now closer to base rates. One factor in pushing bank rates lower is the Funding for Lending scheme - though unfortunately, we haven't seen an increase in credit and lending to business.

Also, savers may well be asking - when will interest rates rise? and when they do rise, how much will they increase by? - For savers, it's not particularly good news. But, mortgage holders will be happy with short-term outlook. - when will interest rates rise?

It does explain why mortgage repossession rates in the UK are low. But, should rates rise, many homeowners may find themselves in difficulties.

Rather worryingly, the UK economic recovery is relying on the old favourites of - higher consumer spending and rising house prices. The fall in mortgage rates has caused an increase in house prices. The government is helping people to buy by making credit more easily available, but this doesn't address the more fundamental problems in the economy.

The fall in the saving rate in the past couple of quarters is quite stark. (Though ONS stats do have a habit of being revised at a later date. e.g. GDP stats and double dip recession, that wasn't really)

Another surprise was to see how much the saving rate has fallen in the past six months. A sign that real income growth is still very weak, and rising consumer spending is financed partly by lower savings.

For the past 20 years, I've heard politicians and policy makers of all shades talk about the need for a stronger UK manufacturing sector - an attempt to end the long-term decline.

Firstly, the decline in the UK manufacturing needs to be put into context. It is definitely a smaller share of the market. But, in absolute terms is still growing. Manufacturing employment has fallen, but this is partly due to a rapid rise in productivity.

Also, an attempt to boost manufacturing could be self-defeating. There is no reason why the UK has to fight a losing battle against lower cost Asian competitors. But, given the UK's tendency to rely on consumer spending, the tendency to boom and bust and the persistent current account - a stronger exporting and manufacturing sector would definitely help the economy to be more balanced.